Trade Your Portfolio

by Wes Bridel on May 18, 2011

in Stewardship

The Trade or Die Portfolio is the next portfolio we’ll look at as we examine different portfolio types for different types of people to weather the current and coming financial storms.  Here’s the last aggressive trading portfolio we covered.

Killer is his name.  At least that’s what his friends call him.  Killer is always looking for an edge.  When he sees the edge he’s looking for, he trades it with gusto.  Many people think that a short trade is riskier than a long trade, but in his eyes, that means they leave the easiest trades to him.  No competition for the prime meat! And besides, what’s the difference between going long or going short if you’re going to watch your positions daily and cut your losses when they hit 15%?

Killer’s style is a bit of a combination between that of Cactus and those of the other investors we looked at above.  He believes in holding a lot of core positions, but adjusting them as needed according to what is happening in the markets.  He watches his accounts daily, but sets aside a couple hours each month specifically to step back and think about what is happening in the economy and in the markets around the world which he is speculating on.  He then decides what percentage he wants to keep in each of his core holdings (within a specified range).  By doing this, he restrains his enthusiasm to predetermined limits while still allowing himself great latitude to position himself according to the opportunities he sees.

Let’s look at Killer’s core holdings…

5-50%   In a Total Return Fund

10-30%  In an Emerging Market Bond Fund

10-50%   In a Precious Metals Bullion Fund

3-30%   In a Gold Miners Fund

5-30%  In a Canadian Energy Fund

5-25%  In an Agriculture Producer Fund

9-60%   In a Various Specific Emerging Market Country Funds

10-30% In a Strong Deep Value Fund

0-20%   In Homerun Speculations as the Arise

We’ve repeated many holdings, so won’t go into great detail about why he holds each (Killer obviously has a similar philosophy to several of the investors we’ve discussed earlier).  What’s interesting is the leeway he gives himself within each of the core holdings.  Those that seem to be the most stable and core holdings have the biggest possible maximum.  While those that have the most potential to go south in a hurry have smaller minimums.  He knows the stories he believes in and he’s committed to following through with them, but is willing to increase and decrease his participation in each sector depending on the season.

Killer watches the trends and when one of his sectors is flying high in the markets, he increases his exposure there to take advantage.  Sometimes he’ll increase his exposure after a big slump seems to be over and he sees a change of fundamental or sentiment occurring in the marketplace and the very beginning of momentum in the position that says his theory is correct.

The last 20%.  This is where the big gambles and the big payoffs happen.  Like Cactus (and any experienced and successful trader), he’ll sit his speculation money (his last 20%) in cash if he doesn’t have a great/high probability trade.  As a matter of fact, Killer makes a lot of the same speculations that Cactus will make, but more than that, he’ll short them when the time is right.  He’s not married to any position with his speculation capital.

So he might go long volatility through a volatility fund and when he feels it’s capped out and headed back down, he’ll short it to make money on the way down too.  Again, he sets strict stop losses whether he’s long or short, so it doesn’t matter to him which way the market goes.

He’ll use double and triple leverage funds to go long or short different segments of the markets.  But always with discipline.  He lets his winners ride and cuts his losers short, so that he always has more capital to trade the next opportunity.

With this blended philosophy, Killer has the majority of his money in the key segments of the economy that he believes in long term while still having a significant portion of his capital that is available for the speculations that he believes will provide the biggest payoffs.  In this way, he has some safety built into his portfolio (albeit in a very aggressive way compared to most investors) and a small amount of money dedicated to the possibility of home runs.  This helps him manage his risk so that he’s less likely to lose everything in the blink of an eye and more able to recover from the bad trades that will surely happen.

This is Part 6 in a series on Real Life Examples of Portfolio Management.  You can read the previous posts at: Pt 1, Pt 2, Pt 3, Pt 4, & Pt 5.  We just finished a series on the different types of investors which you might want to check out at the following links:  Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, & Pt 6.

SocialTwist Tell-a-Friend

{ 1 trackback }

Is Your Portfolio Fully Hedged? | Kingdom Calling
05.23.11 at 5:48 am

{ 0 comments… add one now }

Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Previous post: Put Option Pricing Variables Explained

Next post: Covered Call Options Pay Immediate Income